by J. Robert Smith
Most of us are familiar with the concept that a company’s officers and directors owe fiduciary duties to the company. In fact, most states have codified the fiduciary duties owed by officers and directors. It is also not surprising that upper level managers or those subject to employment agreements are often subject to certain fiduciary obligations. But what about “low-level” or “at-will” employees? I am referring to those non-management employees who are not subject to any employment contract or agreements and who can be terminated an anytime for almost any reason, with or without cause, and can likewise leave at any time and for any reason. Are these employees also subject to fiduciary duties? The answer is yes. In fact, many people are surprised to learn that employees, even “low-level” ones, owe fiduciary duties to their employers.
The rule that employees, including at-will employees, owe fiduciary duties to their employers arose out of the law of agency. Simply put, all employees are “agents” of their employers. And as agents, employees have a fiduciary duty to act loyally for the principle’s (the employer’s) benefit in all matters connected with the agency relationship. Restatement (Third) of Agency §8.01. As comment c to that section states:
All who assent to act on behalf of another person and subject to that person's control are common-law agents as defined in §1.01 and are subject to the general fiduciary principle stated in this section. Thus, the fiduciary principle is applicable to gratuitous agents as well as to agents who expect compensation for their services, and to employees as well as to nonemployee professionals, intermediaries, and others who act as agents.
Now that we know all employees owe fiduciary duties to their employers, what are those duties? Well, as the Restatement explained in §8.01, the duty centers on the duty of loyalty. In fact, Restatement (Third) §1.01 comment g explains that “as agents, all employees owe duties of loyalty to their employers.” But what does that mean?
In the employment context, aspects of the duty of loyalty include the duty that the employee will not compete with their employer, solicit the employer’s customers, clients or employees prior to the leaving the company, or use work time to further the employee’s own interests. It also includes the duty not to misappropriate confidential information or trade secrets of the employer by sharing that information with the new employers. In addition, the duty includes the duty to account for profits and to deal fairly with his or her employer in all transactions between them. It also includes the duty to disclose the existence of conflicts or adverse information to the employer. And this is true even if the employer is not harmed by the undisclosed adverse interest or information. This list is, of course, not exhaustive. There are certainly other situations that can arise in the employment context that obligates an employee to act in the best interests of the employer. Such situations are fact intensive and can depend on the nature of the trade or business.
One such situation that has often resulted in litigation is whether the employee breaches his fiduciary duty to his employer by secretly taking steps to set up a competing business, or seeking employment with a competitor, while the employee is still employed. There is clearly a conflict between preparing to compete, or preparing to work for a competitor, and the duty not to act in any matter that is adverse to the employer’s interest. Nevertheless, the majority of courts that have considered this issue have concluded that an employee is permitted to make preparations to compete with his or her employer while still employed. This is true even if a group of employees agree among themselves while still employed to start a competing business. The rationale behind such rulings is the need for courts to balance the employee’s interests and to promote free competition. See Maryland Metals, Inc. v. Metzner, 382 A.2d 564 (Md. 1978); Scanwell Freight Express Stl., Inc. v. Chan & DiMerco Express, 162 S.W. 3d 477 (Mo. 2005); White Cap Industries, Inc. v. Ruppert, 119 Nev. 126, 67 P.3d 318 (Nev. 2003). Thus, “the law allows employees a privilege to plan and prepare for competition in recognition of the ‘competing interest of allow allowing the employee some latitude in switching jobs . . . .’” Scanwell Freight, at 479. Of course, this privilege is not without limitations. Although an employee may prepare to compete with his employer while still employed, that employee – while still employed – cannot actively solicit an employer’s customers or employees to leave the company. Nor can the employee prepare to compete with his employer, or prepare to work for a competitor, during the time he or she is supposed to be working for his or her current employer.
An interesting corollary to the above privilege involves the situation where one employee knows another employee is planning on leaving the company to start a competing business. Does the first employee have a duty to disclose such information to the employer. As previously mentioned, employees have a duty to disclose information that that the employee knows is adverse to the employer’s business. Based on that rule, one would think an employee who knows another is about to leave and start a competing business would have a duty to inform their employer. But the likely answer is that the employee does not need to disclose such information. For instance, the Nevada Supreme Court ruled in White Cap Industries v. Ruppert, supra, that because an employee has the right to prepare to compete with his employer, there is no duty for an employee to report on the employee who is engaged in such activity. In other words, an employee does not breach his fiduciary duty to disclose information by refusing to tell the employer about another employee who is planning on leaving and competing.
It is also important to point out that resignation does not necessarily absolve an employee from his or her fiduciary duties. Some duties survive termination of the employment relationship. For instance, post-termination competition with the former employer may constitute a breach of fiduciary duty if it is based on information gained during the employment relationship. Therefore, employees should be careful after they depart from employment not to use such information to compete with their former employer.
In conclusion, unless otherwise altered, the relationship of employer and employee is one of agent and principal. As a result, employees have a duty of loyalty and if they act adversely to the employer, they breach their fiduciary duty. As the Restatement recognizes:
However ministerial or routinized a work assignment may be, no agent, whether or not an employee, is simply a pair of hands, legs, or eyes. All are sentient and, capable of disloyal action, all have the duty to act loyally.
Restatement (Third) §1.01 comment g.